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What to consider before lending money to family and friends

 

When your best friend views your nest egg as a source of start-up funds for his latest business venture, or your nephew hits you up for a car loan, your first impulse may be to reach into your bank account to help. But it's a fact that loans to family and friends often end up straining both finances and relationships. As Shakespeare said, "Loan oft loses both itself and friend." In other words, if you lend money to friends, you often don't get paid back, and the friendship itself may disintegrate.

 

It's best to consider a loan to someone you love as an "arm's length" transaction. If you're pondering such a loan, keep the following in mind:

 

* You can just say "no." It's your money, after all. Do you really want to raid an emergency fund or dip into your child's college account to finance a friend's business idea? Think like a bank. It's reasonable to ask tough questions about the person's bank accounts, potential sources of income, planned use of loan proceeds, and spending habits before extending credit.

 

* Consider a gift. If you're comfortable sharing your resources, you may want to provide a monetary gift with no strings attached. In many cases, this is the best solution because neither you nor your friend expect the money to be paid back. Unlike a loan, this type of arrangement can forestall misunderstandings and hurt feelings later on. Of course, you should not give money if doing so would unduly strain your own finances.

 

* Formalize loans. If you decide to lend more than a small amount to a friend or family member, it's generally best to draft a written agreement. This can be as simple as filling out a promissory note (available online or at office supply stores). Such forms spell out the basic terms of the loan -- amount, interest rate, payback period -- and provide some limited protection should you and the borrower end up in small claims court. Another recent innovation is the use of direct lending (also called social lending or peer-to-peer lending) websites to facilitate loans between family and friends. For a fee, such sites can prepare loan documentation, send payment reminders, issue regular reports, even facilitate electronic fund transfers. If the loan involves a significant amount of money, check with your attorney.

 

Remember: Many personal relationships have been damaged when loans go awry. So proceed with caution.

 

24 Apr 2013
New withholding obligation for employers

Posted in tax

The Medicare tax on earned income increases this year for individuals earning more than $200,000 and married couples earning more than $250,000. The tax on earnings above these thresholds will increase from 1.45% to 2.35%. This tax increase will also apply to self-employment income exceeding the threshold amounts.

 

Employers are required to withhold the additional tax from wages exceeding $200,000, regardless of the individual's filing status. They are not required to inform employees when they begin the additional withholding, nor are they required to match the additional withholding.

 

Employers who don't withhold the additional Medicare tax required this year may be subject to penalties in addition to the tax, according to an IRS official. If employees pay the additional Medicare tax at the end of the year, the employer may only be required to pay the penalties.

 

Last Updated by Noel Dalmacio on 2013-04-24 01:49:26 PM